Why I Prefer McDonald's over Apple

The fast-food restaurant behemoth McDonald's (MCD) reported same-store year-over-year sales growth of 2.2% Wednesday. This news caused the shares to move lower as it didn't match up well to last year's numbers. MCD has not really participated in the market rally since March ... on the other hand, it didn't get crushed in the market selloff from September 2008 to March 2009.

If you take a look at the longer-term MCD Weekly Chart below, you can see that it is forming what could be called a "sideways triangle" formation. This is due to lower highs and higher lows, forming a narrowing range of movement and volatility. The Band Width Indicator at the bottom of the chart shows the narrowing range of the Bollinger Bands, also indicating the decreasing volatility. This type of formation is often a "coiled spring" which precedes a major breakout OR breakdown in a stock, index, commodity, etc.

MCD Weekly Chart

What direction will MCD break? Well, there are reasons it could go in either direction. The technicals on the stock aren't great ... if you look at the MCD Daily Chart below, you can see that it has been in a steady downtrending channel (straight red lines) since June. Additionally, Percent R is very low and is breaking below the 20 level, which is generally bearish by our analysis methods. Downside risk would look to be capped around the 50 level, where there is important support.

MCD Daily Chart

HOWEVER, on a fundamental/relative value/logical/experience basis, my analysis is that MCD is a long-term BUY. As a matter of fact, I would much rather own MCD over the much-beloved Apple (AAPL) over a 1 to 2 year time frame. Why do I say this? Well, MCD is a profit-generating machine (around 20% profit margin on the various measures) that has a massive global reach and a good dividend (around 3.6% currently). It is a "safe" blue-chip play in my view with very good value, and is likely to perform well on a relative basis ... AND it avoids major downside risk, as seen by its stability since last Autumn. AAPL, on the other hand, is loved so much its almost become a religion, has higher risk (in both directions), has had a big run up, and is priced at about 25x next year's earnings (MCD priced around 13x). MCD is the safer play by far, in my view.

So, the bottom line is that MCD looks poised for a volatility expansion soon (meaning its options are likely a good buy, premium-wise), although this big move may take a bit of time to develop as it is based on a longer-term move on the Weekly Chart. Its option implied volatilities are in the low 20 percents currently, basically back to the pre-bear market levels. And as a safety/value investment, it looks to be a good opportunity around current levels for a longer-term investment with a good dividend, although its short-term technical outlook isn't great.

Disclosure: Currently no position or client recommendation on MCD or AAPL.

Comments

[BigOlDave:]

Nice reading this article: I've needed some facts behind my hope after taking a hammering on my (MCD) shares.

Sep 11 12:35 PM

[casey00001:]

You forgot to mention that Apple (AAPL) doesn't pay a dividend at all. My take is every company should pay a dividend. If it doesn't, that just means Management is only concerned about their own stock options.

Sep 11 02:03 PM

[mbkelly75:]

I have owned MCD for decades and never have bought Apple. I do not expect to change that opinion. Even if MCD does drop, that solid dividend re-invested will bring really good future benefits. MCD has some very sharp, investor-oriented management and are well worth a long-term investment.

Sep 11 04:16 PM

[peter02l:]

BigOlDave, casey00001, and mbkelly75,

Does any of you eat at MacDonald's?

Sep 13 12:32 AM

[GSlusher:]

MSFT does pay a dividend, but, over the last year and two years, MSFT stock has lost value, while APPL has gained value. Small investors benefit from stock price growth, too. In a bit over two years, I've made almost 27% on AAPL, an almost 13% annual return--and I didn't buy any more AAPL at the bottom--no "readies."


On Sep 11 02:03 PM casey00001 wrote:

> You forgot to mention that Apple
> doesn't pay a dividend at all. My take is every company should pay
> a dividend. If it doesn't, that just means Management is only concerned
> about their own stock options.

Sep 13 01:47 AM

[AdamC:]

Lately a lot of tech pundits had been trying to bring down the share price of Apple, I wonder what is their agenda?

Sep 13 03:29 AM

[trick:]

It's a fantastic business and has really proved it's recession beating abilities. The stock price held up pretty well, because the earnings are rock solid. My target price for MCD is currently $65. I'm not in it yet but if it goes down to $50 (perhaps on investors selling to chase the recovery story in cyclicals) I will get in for a 30% gain.

Sep 13 05:36 PM

[jack dee:]

I like MCD is an investment, I really do.

But the current pricing is simply too high, were is the value, to me McDs is a great long term buy , but not at todays price, there will be other chances to get this cheaper.

Sep 14 05:24 PM

[borisb:]

mcdonalds seems to be worth more and has a small bounce
relative to the early July index lows.

Sep 17 11:21 PM